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New Year, New Budget?

With 2012 just two short sleeps away, I’m sure that New Years’ Resolutions are flooding the minds of just about everyone I know. While New Years’ Resolutions are often tossed to the side mid-January, it is always fun to dream up the reinvented versions of ourselves that the promise of a fresh start has to offer. Personally, 2011 was a tough year for me, financially. And like so many other young adults, I lacked the ability to properly budget my money. My financial goal for 2012, while not overly ambitious, is to make a monthly budget that I adhere to (for the most part). I’d like to minimize the financial stress that accompanied 2011, live comfortably within my means and start to save for my future. While doing my own personal research on this subject, I discovered some really smart tips which have helped me shape my 2012 financial plan!

1. FIGURE OUT WHERE YOUR MONEY GOES.

While modern advances like debit and paperless banking are convenient and green, they can cause you to be completely unaware of your spending habits. Small charges for items like coffee and lunch seem menial, but they add up quickly. Before you sit down to hash out a budget, examine your on-line statements and really evaluate where you’re spending your money. Not only will this help you eliminate or cut back on unnecessary expenses, but it will also help you make a realistic budget that reflects all of your spending, not just set payments.

2. TAKE CHARGE: ORGANIZE YOUR FINANCES.

It is important to take charge if you want to achieve financial stability. You need to have accounts that work for your unique situation. Often, people feel restricted to have one checking and one savings account, when having a third (or more!) can really be of benefit. There are also services offered by your bank that can help you make the most of your accounts and help you save.

Major monthly expenses (such as rent, car payments, cable & phone bills, etc.) are generally the same each month. For this reason, it was easy for me to calculate a lump sum that I consistently transferred from my checking account to my savings account, immediately after receiving my bi-weekly pay cheque. However, because both of these accounts were accessible from my debit card, when things were tight I was able to dip into that savings (a major no-no) for everyday spending. I have recently set up an account that I cannot access from my debit card. That lump sum now sits out of reach until payments are made.

Furthermore, there are tools in place that can help you get a little bit further ahead. For example, I now have a service which automatically transfers 50 cents to my savings account for every purchase I make using my checking account. While it seems small, this can quickly add up to an extra $20+ a month that you don’t notice at the time.

3. ACCOUNT FOR EVERYTHING!

To make a budget that really works, you have to take a lot of variables into account. Make sure your budget is detailed and thorough.

DIFFERENTIATE BETWEEN GROSS AND NET INCOME: The annual amount that you make on paper is nowhere NEAR the amount that you clear after taxes. Make sure that when you make your budget you use your net income as the starting point of reference.

OVER-ESTIMATE FOR VARIABLE EXPENSES: Groceries are a prime example. Groceries have fluctuating costs, and while some weeks I can spend as little as $25, where other weeks I can spend as much as $75. If you over-compensate for this, whatever you have left over can be put into your savings account or spent on something nice for yourself!

TAKE SPECIAL EVENTS INTO ACCOUNT: You should always account for ‘Entertainment’ in your budget. Whether that amount goes towards a weekly meal out with friends, drinks at a pub, or a trip to the movies, it is important to take your social life into account. Besides that standard amount per month, you should also look at each month individually and plan for special events like Birthdays, Anniversaries, etc. Any special event that will give you reason to go out for an extra evening or where you are purchasing a gift should be accounted for.

We’d all love to be able to save 50% of our income, but realistically we know that can’t happen. So, sit down and figure out what you’re saving for and how to start growing towards your goal. Calculate a monthly payment for each goal, and incorporate it into your budget. Here are a few examples, using my goals for the year:

Emergency Fund: $500 ($42/month)
For those things that just pop up out of the blue – I have never had one before, and can’t wait to have a bit more peace of mind!

Retirement Fund: $500 ($42/month)
While I already pay into a pension plan at work, it’s important to start personal retirement savings now. Analysts are predicting that by the time our generation reaches the age of retirement, the Canadian Pension Plan will have run out of money. That being said, starting to save for retirement now is actually really important!

Trip Fund: $1000 ($83/month)
I think realistically it will take me until 2013 to be able to afford a big vacation. Instead of breaking the bank next year, my plan is to put a little bit away every month so that I have a nice travel nest egg when I’m ready to take flight!

5. PREPARE TO MAKE ADJUSTMENTS.

A budget is like a boyfriend; you need to test the water to make sure that you’re compatible! The first 3-4 months are going to be trial and error. You may have grossly over or under-estimated different aspects of your budget. Make sure you test it out and make adjustments where needed and don’t panick if it doesn’t work out right away. Re-vamp your budget and keep working at it!

**Need some advice? There are lots of online resources that can help you with your finances and planning a budget. Personally, I have really enjoyed looking through financial guru Dave Ramsey’s website. Not only is there a ton of information about getting out of debt and how to save for a comfortable life down the road, but there are also tools that can show you what your projected wealth could be, and plan a realistic personal budget to help you get there.